Many Connecticut banks are having second thoughts about accepting funds from the Troubled Asset Relief Program (TARP) due to concerns that the federal government will impose new conditions on those who take the money.

Gerald Noonan, president of the Connecticut Bankers Association, said he has spoken to officials from at least 20 Connecticut banks who were interested in TARP funds, but are now questioning whether it's worth participating in the program.

"The Treasury is making rules up as they go along," Noonan said. "Why should banks put themselves at risk for something that no one has explained or defined what the terms are? Banks that could use it are weary of what they'll have to do down the road to get it."

Wethersfield-based Connecticut River Community Bank applied for TARP funds last year, but when it received approval for $3.9 million in January, bank President and CEO William Attridge notified regulators that he was no longer interested.

Attridge said the problem is that the terms of the program are open-ended and banks that agree to take the money must comply with any future changes made to it.

"There is too much unknown and too much risk," Attridge said. "We didn't want to get into something that would change over time."

After announcing modifications to the federal bailout program in a major speech Feb. 10, U.S. Treasury Secretary Timothy Geithner acknowledged that the plan was still only a vague outline. Wall Street didn't react well to that level of uncertainty, as the Dow Jones Industrial Average dropped nearly 400 points that day.

Three Takers

So far only three Connecticut banks have taken TARP funds: Waterbury-based Webster Bank ($400 million), First Litchfield Financial Corp. ($10 million), and The Connecticut Bank and Trust Company of Hartford ($5.4 million).

In addition, Bank of America, which has a market-leading $15 billion in deposits in Connecticut, has accepted about $25 billion in TARP money so far.

But nationwide, at least 50 banks that qualified for aid have rejected the Treasury's funds because the terms have not been specified, according to the Office of Thrift Supervision.

Attridge said his bank applied for the funds because it appeared to be relatively cheap capital that it could immediately lend out to the community. Banks receive TARP funds at 5 percent interest, but that rate jumps to 9 percent after five years.

TARP funds also come with other terms and conditions that can change after a bank has accepted the money. That means banks may be required to comply with measures that they didn't originally agree to, Attridge said.

President Barack Obama and members of Congress are under public pressure to toughen conditions on the TARP money in order to improve the bailout's poor public image. That may mean more onerous reporting and compliance requirements on top of the lengthy procedures already in place.

For example, months after the TARP program was up and running, Obama imposed $500,000 caps on senior executive pay for certain financial institutions receiving federal bailout money (though banks that had already received funds were exempted).

When the TARP program was launched last fall, Treasury officials said the intent was to revive bank lending.

But Noonan said that if the federal government keeps the terms and conditions of TARP obscure, it will defeat the purpose of the program.

"If you are well capitalized and don't need the money, it's going to give you less of a reason to take it," Noonan said. "That won't help revive lending."

Preferred Shares Dilution

As of Jan. 23, the Treasury had disbursed about $293.7 billion in TARP funds. Most of the money went to purchase preferred shares of 317 financial institutions, according to a recent report from the Government Accountability Office.

Attridge also said the additional capital and related preferred stock dividends would significantly dilute earnings per share for common stockholders. He said he's also weary of government intervention in the banking system.

"It's contrary to the capitalistic system we've been operating in," he said.

But some Connecticut bankers still believe it makes sense to take TARP money.

Benefits Outweigh Risks

Simsbury Bank and Trust, with $223 million in assets and five branches, recently received federal government approval for $4 million in TARP funds, and, pending shareholder approval, plans to accept the money.

Martin Geitz, president and CEO of the bank, said the benefits of the extra capital outweigh the risks of more stringent regulation down the road.

"In a very weak economy, having extra capital is important for a bank," Geitz said. "It gives us more flexibility in lending and will help us grow in the long run."

Geitz said the extra capital will help the bank continue to steal market share from larger banks and help offset inevitable weaknesses among borrowers due to the recession.

Banks are already highly regulated, said Geitz, who noted that he's confident any new conditions to the program will be aimed at larger Wall Street banks that have been the face of excess and greed.

"I feel like many of the tougher requirements won't roll down the hill to local banks," Geitz said.